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Economists question efficacy of tax incentives in omnibus law

Economists question efficacy of tax incentives in omnibus law Officers assist taxpayers in filling in their annual tax returns at a tax office in Jakarta on March 11. (JP/Dhoni Setiawan)
Adrian Wail Akhlas
Jakarta   ●   Wed, October 28, 2020 2020-10-28 08:31 199 e22cd4161040e111d73a5626c4d37a7a 1 Business tax-incentive,Omnibus-Law-on-Job-Creation,job-creation-law,indef,tax-ratio,tax-reform Free

Tax incentives stipulated in the recently passed Job Creation Law have raised questions among economists over whether they can attract investment and boost state revenue going forward.

The Institute for Development of Economics and Finance (INDEF) researcher Nailul Huda said the country’s tax regulations were actually not the main obstacles in attracting foreign investment, citing the 2018 World Economic Forum Global Competitiveness Report. The report cited an enabling environment, human capital, markets and innovation ecosystem as the causes of Indonesia’s stagnated competitiveness.

Therefore, Nailus questioned the urgency of the government’s plan.

“Several incentives provided by the government, such as removing the tax on dividends and easing tax requirements for foreign nationals, are insignificant to jack up the needed state revenue in the immediate term,” he told a discussion on Tuesday. 

“The problem is that the tax ratio has been declining over recent years, but the government continued to provide incentives.”

Under the omnibus law, foreigners who work in Indonesia for more than 183 days a year will be taxed on only the income they earn in Indonesia, while Indonesians working abroad for more than 183 days will be exempted from paying income tax in Indonesia.

Furthermore, the law will remove the tax on dividends gained from home and abroad as long as they are reinvested in Indonesia. The law will reduce penalties on late tax payments but also introduced a 10 percent value-added tax (VAT) on coal.

The provisions in the omnibus law aim to complement several rules in Law No. 2/2020, which was issued earlier this year. The law gradually lowers corporate income tax and imposes VAT on services and goods sold in Indonesia by global technology companies, among other things.

The COVID-19 pandemic has sapped tax revenue as the government collected only Rp 750.6 trillion (US$51.16 billion) as of September this year. Tax collection fell 16.9 percent from the same period last year and around 62 percent of the government’s target as a result of a sharp fall in import taxes and corporate income taxes.

Indonesia expects to record a budget deficit of 6.34 percent of gross domestic product (GDP) this year as state revenue plunges amid cooling economic activity at the time when the government earmarks an additional Rp 695.2 trillion in spending to revive an economy reeling from the pandemic.

Indonesia’s tax ratio declined to 10.69 percent in 2019 from 11.42 percent in 2018, but the pandemic and the government’s incentives are expected to further lower the ratio to 7 percent this year, Nailul told the discussion.

The government estimated the tax-to-gross-domestic-product ratio to reach 8.57 percent this year as the country grapples with an economic downturn caused by the COVID-19 pandemic.

The government, he went on to say, should evaluate whether or not its tax incentives would be able to support micro, small and medium enterprises (MSMEs) and improve the investment climate and community welfare.

“The government must evaluate these tax incentives to see whether it will have a positive impact on the people,” Nailul said.

Several economists and tax experts have expressed hope that the policy in the omnibus law will be beneficial for the country in the long run.

“In the short run, these policies tend to reduce the government’s revenue,” Bank Permata economist Josua Pardede said on Oct. 12 “However, as the investment grows following these incentives, government revenue will potentially increase in the long run.”

State officials have defended the policy.

“We put this tax policy in place to boost economic activities, provide fairness and legal certainty and encourage compliance. That is an overview of our instrument for reform,” said taxation director general Suryo Utomo on Oct. 12.

Deputy Finance Minister Suahasil Nazara said on the same day that the tax reform was necessary as it would simplify tax administration and increase compliance, as well as improve regulations, information technology and human resources.

“We need to find the right balance for the tax policy in the context of collecting revenue and boosting investment.”